Regardless whether your corporation is in it for the money or to serve some nonprofit endeavor, you need to be aware of applicable conflict of interest law if you serve on a board of directors. The type of applicable law depends on whether the entity is a for-profit or nonprofit corporation. Whereas for-profit corporations must comply with state law in this area, nonprofits are governed largely by the Internal Revenue Service.

Definition

A conflict of interest is a situation that could potentially undermine a board member’s objectivity. For example, a conflict of interest would exist if the board voted to hire a janitorial service that was owned by a board member. Under such circumstances, that board member would have a conflict of interest, because he had personal interest in the outcome of the vote.

Nonprofit Boards

Conflict of interest became a critical issue for nonprofit boards in 2008 when the IRS began to require that all nonprofit corporations have a conflict of interest policy. If your board is applying to become a nonprofit, IRS form 1023 contains a sample conflict of interest policy for boards to tailor to their own needs. The 990 tax form filed annually by nonprofits specifically asks whether the organization has a written conflict of interest policy.

For-Profit Corporations

Conflict of interest is governed by the state corporate code. Most state laws are similar and have three components when it comes to board conflicts of interest: Transactions that involve a conflict of interest are void unless the board member’s conflict was disclosed and the board of directors approved the transaction; the board member’s interest was disclosed and the transaction was ratified by the shareholders; or the transaction was fair to the corporation.

Culture of Candor

Regardless whether the directors sit on a for-profit or nonprofit board, the IRS suggestion that boards develop a culture of candor is helpful. A conflict of interest is not necessarily bad, especially when the interested board member is motivated by a desire to help the corporation. However, full and complete disclosure of the conflict prevents board members from acting strictly out of their own self-interest.

About the Author

Shelly Morgan has been writing and editing for over 25 years for various medical and scientific publications. Although she began her professional career in pharmacological research, Morgan turned to patent law where she specialized in prosecuting patents for medical devices. She also writes about renal disease and hypertension for several nonprofits aimed at educating and supporting kidney patients.